* Stock volatility hits 2013 high
* Demand for E-STOXX 50 options to hedge against 5 pct fall
* Bets on stocks falling outpace bets on rises 2 to 1
By Simon Jessop and Toni Vorobyova
LONDON, Feb 27 European option investors have
sought protection against a further 5 percent stock market slide
in the coming weeks after an Italian election that threatened
political stalemate and more market uncertainty.
With no party in a strong enough position to govern alone --
and the prospect of prolonged gridlock -- the euro zone
blue-chip Euro STOXX 50 index ended Tuesday down 3.1
percent, and some expect an even deeper fall.
Buyers snapped up twice as many put options -- the right to
sell the index -- than calls -- the right to buy -- on Tuesday.
Over 1.25 million Euro STOXX 50 put contracts traded on the
Eurex exchange, more than double the Monday's volume.
Options exercisable once the index hits 2,400 and 2,500
proved the most popular put bets for March, flagging concern
among investors that it could fall by 5 percent or more by the
middle of next month.
"I wouldn't say option investors are necessarily panicking
here, as a number of them are already hedged, but they are now
wondering how far this move goes," Abhinandan Deb, head of
European equity derivative research at Bank of America Merrill
After hitting an 18-month high in January, euro zone blue
chips had already turned lower in the run up to the
Sunday-Monday vote on concern Italy may struggle to drive
through the economic reforms needed to rein in its borrowing
costs. The Euro STOXX 50 is down 2.4 percent so far this year.
Options on the index, made up of the 50 biggest companies in
the euro zone, are the most popular method of hedging regional
stock risk as they are highly liquid, allowing investors to
enter and exit the trade easily.
Demand to buy protection saw the price of a March Euro STOXX
50 put exercisable at 2,400 more than triple on Tuesday.
It also pushed the Euro STOXX Volatility Index,
which reflects options pricing and is a gauge of future market
swings -- implied volatility, or vol for short -- to a fresh
intraday 2013 high.
More could be on the way.
"Given it's a messy political situation where clarity over
direction can take time to emerge, there is little rush to fade
the vol spike (sell into the rally in volatility) just yet,"
BofAML's Deb said.
Nick Xanders, head of European equity strategy at brokerage
BTIG, said the Italian election result, combined with political
uncertainty in the United States around its budget battle, could
see the index fall even further.
"Those who did buy puts should roll March options out into
April and May, with lower strike prices, because of the
continued uncertainty surrounding the Italian elections and also
the U.S. sequester," he said, referring to the U.S. spending
cuts due to kick in March 1, unless a new budget deal is agreed.
By "rolling" an options position, the investor's bet is
carried into subsequent months rather than expiring. For April
expiry, 2,200 points was the most popular put strike on Tuesday,
implying a fall of some 15 percent for the E-STOXX 50.
Demand to protect directly against a further near-term fall
in Italy's blue-chip FTSE MIB cash index, which led the
regional fall with a drop of nearly 5 percent on Tuesday, also
rose sharply, even though the contracts are not as liquid.
Ugo De Pasquale, volatility trader at Qubed Derivatives,
said short-term volatility on Italian shares was up as much as
10 percent, especially on financial stocks.
"I think vols are going to stay where they are now unless
the (centre-left) Democratic Party clearly signals it wants to
form a great coalition, in which case they can fall back where
they were before this move. I'm trying to sell a bit of
long-term vol whenever I can.
Thirty-day implied volatility on the FTSE MIB
jumped on Tuesday to around 33, its highest
level since early August, Thomson Reuters data showed.
Longer-dated volatility saw a similar jump but held lower
and with little difference between puts and calls.
Given the scale of falls in several bank shares after the
election -- with Mediolanum posting its biggest one-day
fall for nearly 12 years -- Italian regulators quickly banned
negative bets on some stocks.
Such bets, known as "short-selling", are often used by hedge
funds and involve borrowing a stock from a longer-term holder,
such as a pension fund, then selling it in the hope of buying it
back more cheaply later.
However, David Lewis, EMEA Head of SunGard Astec Analytics,
which collates share lending data, said demand to borrow
individual Italian stocks had held fairly static in recent days.
"That is an indication that investors are choosing to bet on
broad country-level macroeconomic risk (through options) rather
than stock specific factors," he said.
Stewart Richardson, CIO and partner at RMG Wealth
Management, which manages about $100 million, said the rise in
options prices showed the market was "rightly on the defensive".
"We have been cautious on European equities for a few weeks
now, and we went into yesterday bearish on Europe and we
continue to think bearishly," he said. "Our view is that this is
part of a much bigger problem so at the moment we are sticking
with June puts on Euro STOXX 50."